Wall Street Crash:
Have we actually learnt anything?
Source: FRED and US Department
of Commerce
November is a time of year when many Europeans and
Americans reflect on Armistice Day, a commemoration of the end of the First
World War. Having grown up in the UK, I have a childhood memory of the
autumn turning to winter and putting on my overcoat on a frosty morning,
poppy firmly attached to the lapel.
2014 is of course especially poignant as we commemorate
the centenary of the outbreak of that dreadful war. It seems that every
modern historian has his/her own theory as to why it all began, what the
implicated governments’ motives were. That debate will never be resolved,
yet a few times since the centenary commemorations began in July, it has
crossed my mind what the world was like before war broke in 1914, and how
the future would have looked if the peace had been kept.
Source: FRED and US Department
of Labor: Bureau of Labor Statistics
One interesting theory, from Scottish-born Harvard
professor Niall Ferguson,1 is that if the British
government had said no to war, at that fateful cabinet meeting on 4th August
1914, the outcome would have been different - even if all the other powers
had mobilized troops.
Ferguson points out that Britain was not obliged to
declare war on Germany and without its intervention, the Germans could have
quickly won the war and created a European union, without the catastrophic
loss of life on all sides. Whilst this may seem like mere speculation, it’s
worth considering that part of the German government’s war aims was to
create a European economic association, dominated by Germany of course.2
Source: USDA
Had that become a reality, there may not have been the
level of resentment, which pulled the delegates at the resulting Paris Peace
Conference away from the task of creating a new peaceful world, back to the
demons of the recent past. In his excellent eyewitness account of the peace
talks John Maynard Keynes’ observed that the French delegation was out for
revenge for defeats in 1871 and 1914 - led by the crusty Tigre, Prime
Minister Georges Clemenceau.3
Keynes became dismayed about the future, commenting: “The
proceedings of Paris all had this air of extraordinary importance and
unimportance at the same time. The decisions seemed charged with
consequences to the future of human society; yet the air whispered that the
word was not flesh, that it was futile, insignificant, of no effect,
dissociated from events; and one felt most strongly the impression,
described by Tolstoy in War and Peace or by Hardy in The Dynasts, of events
marching on to their fated conclusion uninfluenced and unaffected by the
cerebrations of Statesmen in Council.”
It makes you realize how tragic the two world wars really
were when considering where we are today. Just like in the summer of 1914,
the global economy is struggling - a look at US trade, employment and the
number of people requiring food stamps shows the current situation.
Back in 1914, the Austrian ultimatum to Serbia caused
global financial panic and a liquidity crisis on, amongst others, the London
Stock Exchange as investors rushed to turn cash into gold.4
As for the US, the economy was in recession.5 Just as
in 1939, economic woe relieved demand for American goods after the outbreak
of war.
A century later, we find ourselves in a global economic
downturn with no end in sight. Not only that, Europe is relying heavily on
Germany to help out6, while analysts call for it to
reduce its intervention.7 Not only that but today, as
in 1919, policy leaders appear to be carrying on regardless of the reality
in front of their eyes, with a dismissive air of inevitability. In spite of
finally abandoning its Quantitative Easing money-printing programme, the
Federal Reserve is yet to come up with a credible solution to, or even
recognition of, the debt crisis. Like Keynes in 1919, there are some highly
credible economists shouting from the rooftops that this is an opportunity
and a necessity to start a fresh approach to the world before we hit another
crisis. Among them are Steve Keene, Ann Pettifor, James K. Galbraith and
Michael Hudson who are part of IDEA Economics8, an
institute of which I am an advisory board member.
Given that economics failed to predict the Global
Financial Crisis - the biggest economic event in generations, failed to
repair the damage and still fails to provide relief to real businesses and
real people in the aftermath, IDEA has based its approach on three basic
principles: debt matters, money matters and the economy is dynamic.
‘Debt matters’ means that stagnation and decline will
continue until we actually deal with the debt. ‘Money matters’ is the point
that credit creates money, not a central bank: continued unmanaged money
creation by banks (e.g. when lending) will continue crises and instability.
‘The economy is dynamic’ principle is the observation that the economic
theory of equilibrium (i.e. the automatic return to normal) is not
supported by either logic or evidence.
We cannot rely on equilibrium or a third world war
to solve the next economic crisis. It’s time to change our perspective and
use 2008 as a lesson of how not to structure our modern economy. We can’t
afford to let the opportunity slip through our fingers this time.
There’s a cyclicality in debt and inequality that has
tended to result in war for as long as mankind has organized itself into
competing societies - a global conflict in the coming decades would be
cyclically consistent with this. We therefore need to break this cycle if
war is to be avoided - the proliferation implications of nuclear holocaust
by themselves probably only amount to a limited not an absolute deterrent.
For the deterrent to be absolute we need to combine a version of nuclear
horror with a healthy respect and remembrance for all those who put their
lives on the line in the belief that they were fighting wars to end all
wars.
Footnotes:
1 N. Ferguson, Virtual History: Alternatives and Counterfactuals
(1997).
2 B. Tuchman, The Guns of August (1962), p.315
3 J M Keynes, The Economic Consequences of the Peace (1919)
4
http://www.telegraph.co.uk/finance/personalfinance/investing/11113621/Edward-Bonham-Carter-The-forgotten-financial-crisis-of-1914-has-parallels-100-years-on.html
5 http://www.nber.org/digest/jan05/w10580.html
6
http://www.spiegel.de/international/germany/german-economic-growth-helps-move-euro-zone-out-of-recession-a-916553.html
7 http://www.telegraph.co.uk/finance/economics/11160944
/Eurozone-in-crisis-Germany-could-enter-third-recession-in-six-years.html
8 http://www.ideaeconomics.org/
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